Further Comments on Takahiro Miyao

Craig Freedman (Professor, Macquarie University, Australia)

This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 24, 2003: posted here with the author's permission.

I would have to respectfully disagree with Takahiro Miyao in this case (http://www.glocom.org/debates/20030526_miyao_res/). Interest rate policy is an attempt to influence consumption and investment flows via the price of credit. This is how I see the two examples Takahiro Miyao has so kindly supplied. Changing the price of credit is not equivalent to driving up the price of assets via government purchase. In the first case, increased income flows changes the prices of stocks. In the second, increased prices of stocks lead to increased income flows. Notice in the Greenspan　example, during the nineties Greenspan more or less followed the market, allowing credit to expand with his estimate of what the current and future market demand for that credit would be. Recently he has been much less successful at getting a stalled US economy started by lowering the price of credit in advance of market demand for credit.

As for affordability, I was speaking of the Sydney market where affordability has decreased. Younger people have been loading up on debt, making the assumption that housing prices can only go up and that they will continue to be employed while gaining ever increasing income levels. They are underestimating the inherent risk of this position which is potentially dangerous for the Australian economy. And hard hearted as I am, I wouldn't have too many tears to shed if the current housing boom broke in Sydney. Home owners (and even more so, all of those who have bought apartments as　investment units) have hoped to gain through speculation. Having their speculation turned sour is part of the game. That is what is meant by taking on risk.

Let me note, that none of this undermines the legitimacy of considering tax reform and other measures that might lower the cost of purchasing assets such as real estate or stock.